Re-think Subsidies, Re-charge Indian Economy

Politics and Economics; Are they steadily intertwining in India with the maturation of Democracy - What's the way forward?

By : Amit Bhushan; Date: May 2012

The rise is Commodity prices of Agricultural products in year 2010 and the strong resistance of any attempts of the government to help in moderation of the prices – is an important signal for the Political forces in India. It shows that Rural or to be more specific ‘Farmer' politics has come of age in India. The Indian Farmer is now more educated and aware of ‘Price situation' of his produce across the World. Any attempts by government to influence the prices for the domestic market would therefore be strongly resisted by their ‘Collective Commune'.

The Farmers are also going to protect their turf fiercely like attempts to raise input prices in the name of targeted subsidy distribution for Fertilizers. They are also going to ensure that privileges of yesteryears such Government's commitment for ‘Minimum Support Price' for food products are continuously revised as per inflation and would continue to ‘seek' productivity support tools such as ‘cheap or free power'. The result is that we has rotting grains in the granaries of the government which lack proper storage space, however the government is forced to store bumper produce to maintain its commitment of ensuring minimum support price.

The situation might smack of ‘opportunitism' by a political class to exploit other forces in disarray. From the standpoint of Political parties, the situation is a beneficial one for them as this allows them to show their benevolent face to the Farmer where the government is being seen as giving a direct handout to farmer for purchase of his produce. However a chunk of poor landless worker earning a daily wage of INR 100 a day to support his family of 4-5 people doesn't have enough money to pay for sufficient quantity of grain as he cannot afford to pay the delivered price (which is ‘in reality' higher than the minimum support price, due to leakages in rationing system). The politicians seem happy to create another dependency by offering him some kind of employment support through MGNREGA. The culture of offering subsidies is extending to ‘Free' distribution of Television, Mobiles, Foodgrains, Bicycles, Computers is causing extensive damage as most of these scheme is not linked to any improvement in productivity of the population. It is creating a burden on tax paying population as the Government borrows the money from institutions and then taxpayers to bear the cost of funds/interest. The outstanding loan for most Governing set up/institutions is already at unsustainable levels and these governments have been declared as bankrupt by Credit Rating Agencies.

The situation is a result of uncalculated over-commitment by our collective politician class and their ostrich like behavior to bury their head in sand and not recognize the deteriorating situation. Some of the politicians are still pushing for a ‘Food Security Scheme' and they cite guideline of courts as argument for their actions. The fact is, no – one said that payment of bills should be postponed. They want to turn government's investment into grains to subsidy for distribution of grains to poor – a sure recipe for disaster from fiscal standpoint. It is high time that our institutions for analyses of economic and political situation come out and debate these points in public in order to raise our collective education level so that our illiterate voter is at least a bit more conscious.

While the going was good for the Industry and middle class wages were booming, the coffers of the government were also growing. Such schemes were nascent with limited distribution, were affordable. However, with the slowdown in Industry as well as a break in growth of wages, the situation is turning to be alarming. The government and politicians certainly need to take a pause and de-clutter the unsustainable proposition and instead look at more sustainable and income generating option within the Private sector especially the one which does not ask for subsidies or can do with much lesser subsidies. One of the ways could be to make a sincere push for Horticultural exports. The Fruits, Vegetables, Flowers are in fact relatively more employment extensive than grains. The government can formulate a clear policy for select Fruits, Vegetables and Flowers in order to allay concerns of the producer and buyers that should ensure sustained and dependable markets for producers as well as a reliable sourcing base for buyers. The government may ensure some interest subsidy as well as allow approved buyers to roll out government sanitized contract farming scheme to ensure steady markets for sellers. The government may also allow some market building or branding support to companies that to lay a strong foundation for such high productivity exports. India's location of being near to large Food import markets in Middle East could be exploited to the country's advantage.

The government should also make sincere attempts to grow the ‘Allied agricultural sector' exports such as Honey, Poultry, Milk products, Meat, Hides and skin, Garden plants, Medicinal plants and herbs etc. It is not a rocket science that ‘allied agriculture' can be a big employment generator. However in spite of the fact, most of the government's attempts to develop the sector have resulted in losses with commensurate gains in rural productivity and employment. Much of this is because of government using its bureaucracy with staid ideas and highly procedural approach. The sector is badly in need for creative inputs where growth ideas are in sync with the willing producer in the village and the solutions are affordable. This needs customized solution delivery to each producer in village who may be willing to experiment with the idea. If possible, he should also have some insurance to take care of the failure which in many cases may imply that a family will not have much to sustain itself expect for plying as landless labour for next few seasons.

Though the private sector in making forays and they are trying to entice the farmers. Quite a few have success stories to share where they have been able to improve the lot of farmers working with them in manner that may be pronounced as significant by the farmer experiencing such transformation, however for each new farmer to ride on such bandwagon- there is a big calculation. With his tiny land holding and a large number of mouths to feed, he seems to have very little experimentation options. He looks for explicit guarantees which the private sector in not able to provide as their model is based on successful performance. The poor illiterate farmer is not able to commit his investment for the season on an experiment whose performance has never been experienced or understood by him.

The subsidy regime of the government is a big insurance for him. Therefore he shuns relatively more productive experiments offered by the emerging opportunities sector. Thus, the government and politician class of the country ensures that our rural economy remains trapped in a low productivity-low wages vicious trap, sustained with huge dollops' of taxpayer's money and productivity enhancement programs from the private sector continue to face huge resistance. It is time for our media, experts, entrepreneurs and social activists to bring forth such issues and discuss the direct and indirect consequences of our economic policies on public behavior, their impact on nation's productivity and competitiveness.

The importance of politicians being able to ‘pull jobs' to an economy and sustain such jobs is always an important factor. We as people must try and understand that jobs – in essence are a function of productivity and competitiveness. They will come to us as a nation till we can serve the Rest of the world in a competitive manner. The subsidies can only tilt balance to a certain extent. Creating a permanent dependence on such subsidies is likely to result in atrophy of productive capacity of the nation resulting to huge and painful changes later like some of the European nations like Greece are undergoing presently. As a nation we should be clearly able to identify what kind of subsidies is needed and more importantly why they are needed including when these should be cut off. To the extent possible, subsidies should be directed towards improvement in productivity of the population rather that to sustain consumption or wastage.

The intent of the article is not to justify, stoppage of subsidies, but only to highlight the need for monitoring and realignment of subsidies at yearly budget in a rigorous manner. The officers involved in a subsidy program should be re-trained and realigned to new and more justifiable/productive program. It is important to appreciate that even well meaning subsidies lose their relevance with time e.g. the subsidies for fertilizers made sense in the decade of sixties and seventies, however their continuation is now on a drain of exchequer and delivers little growth in subsidies. With over dose of fertilizers, the land may in fact be losing its fertility. So, it is pertinent that the subsidy programs should be reviewed, with necessary amendments at not only budgetary allocation level but at operational level as well. These should be regularly assessed for measurement of their effectiveness by politicians and experts. The Parliamentarians and Assembly members should actively assess as to how effective these programs have been to deliver benefits in form of growth of productivity of people in the targeted areas/regions. The culture of Handouts must be understood as an unsustainable one, while improvement in productivity is an arena which is capable of bringing ‘Lasting and sustainable Prosperity' to an area/region.

The unfortunate part of subsidies is that the Handout creates a system or a class of beneficiaries which lobby vigorously for its continuance. The politicians have little ‘will' to disturb the set up in their desire to play ‘God' for the constituency. Often, the cronies of the ruling class develop interests in ‘leakages' of such programs and drive undue benefits. Since, the politicians need ‘money' to win elections, the turn a blind eye to such ‘leakages'. Such subsidy programs also create ‘Unwanted' dependencies amongst a class of people (who champion against lifting/withdrawal of the subsidy) as well as businesses/industries thriving on ‘Cheap government money'. Also, our ‘Babus' having ‘Permanent jobs' are resistant to change especially ones that forces them to ‘transfers of location' or puts them in a piquant situation of having to work with a new set of people with different set up often because their system for ‘incentives' (read corruption hand outs) is disturbed. It is not the intent of the article to discuss this further.

Fortunately, with existing technologies India does have a chance to improve productivity especially in Rural India in a substantial manner. What this would require is Political Will and innovative approach to devise and implement programs and focus on monitoring for timely implementation and without leakages, which is hallmark of most of the current subsidy programs. These programs may include:-

1.Planned Village Development: This may include private builders to develop planned colony with sanitation, tap water supply, electricity supply and local roads for villagers. A subsidy of upto 15-20% of the project cost upto 3Cr. Per project may be borne by Center and state for projects that has provision for 150-200 families in rural area. Some additional benefits may be provided if such villages are developing Solar Power generation, Water Harvesting, Bio-mass usage and Common Animal Shed etc. through respective Ministries. The project subsidies may be routed through Gram sabhas which may base the service distribution on a User Pay model and generate revenues to maintain the systems. This would spur investments in Rural India to develop housing. An additional service such as schools, public assemblies and entertainment center would come in through entrepreneurs. An overall beneficial effect on economy will be tremendous and long-lasting compared to discreet programs currently. Quite a few villages (several hundreds) would be able to generate 25-50Cr project investments for proper housing and this would raise employment and productivity as well as improve growth prospect of the nation.

2.Allied Agri Production Support Scheme: The Government should built focused program to develop allied agricultural sector. This could include subsidizing Veterinary doctors to visit rural area to run programs to improve live-stock's productivity. Such programs could be partially subsidized by government through Panchayats, which are directly answerable to people. Similarly, Government should send some revenue to Panchayats for engaging Agri scientists, consultants and entrepreneurs for improvement in horticultural products farming/poultry/Apiary in village, its marketing support, storage and distribution services. A clarity in policy regarding exports of such products would be of considerable help. The government policies such as imposition of blanket bans and minimum export price on some products like onion has hindered farmers to take up its production in a big way and help India emerge as a big exporter of the bulb. Although all indicators show that per dollar input of fertilizers, irrigation(which are subsidized input) and manual labour for onions is less than per dollar input for Basmati Rice. Thus our subsidies are creating distortions that may not be helping us in any way.

3.Rural Handicraft Industry Support: The government should encourage rural handicraft industries to generate Solar, Wind and Bio-mass power, install water harvest scheme through specially designed Credit support scheme or targeted subsidies. Organizations (Profit making as well as not-for-profit) providing such units with branding support, marketing and distribution services, technology & design inputs and quality control support should be recognized and rewarded in altruistic manner.

4.New Crop Agriculture development and Marketing support: The government should encourage farmers take up new and more valuable crops. This is pertinent as our farmers have relatively small land holdings as compared to farmers in countries like US, Canada, Australia etc. Thus our farmers need to put more creative inputs to their fields to generate better revenues. Tying them to ‘Grains' may help the nation to have adequate grain stocks without relying on imports, but the income of farmers is tied to the price of the grain which the buyers will definitely compare with prices of grain from the competing countries. Our farmers with their current low productivity per hectare/acre have little chance to out-compete farmers from these countries.

5.Rural Light Industries: The Government may offer subsidies for Light Industries to set up manufacturing/assembly operations in rural areas. This may be in the form of a corporate tax rebate basis per permanent employment, say upto INR 2 lacs per permanent employment created in designated Rural area/village subject to prior approvals. In the short run, quite a few small units may shift from costly urban centers (and give impression of subsidizing of job shift by government), however in medium to long run it will improve rural demand and productivity. The urban areas can adjust to such shifts by easily moving to higher value added industrial production by getting in technology and capital from various sources including foreign capital. The impact of ‘Capital deepening' in urban centers would wane, leading to more productive capital and better incremental capital output ratio.

6.Rural Back offices: Again, the government can subsidize large and mid-sized corporate to shift their back offices to rural/village centers with incentives similar as above. This would improve prospect for rural employment, their attitude towards education, personal hygiene etc. due to incentives in form of employment in the commercial sector. Resultant boost to rural tourism and service sector would also be tremendous.

The above schemes will result in a behavioural shift against unproductive investment into say ‘gold' and bring for a decline in hunger and poverty in rural areas/villages. It would also improve the inculacation of respect for Law and improve governance of rural area, currently a nightmare for security forces, a fact buried under carpet by government and media. It would also improve outlook of our villages towards growth and productivity, bringing an end a vast shift of investments from capital deficient rural areas to urban India that takes place every year so that just a few of rural elite can become City dwellers.